U.S. Prepares Suit to Block Halliburton-Baker Hughes Deal

The Justice Department is preparing to file a lawsuit to block a proposed merger between Halliburton Co. and Baker Hughes Inc., the most recent sign that a takeover boom is meeting resistance from U.S. regulators and antitrust enforcers.

The suit could come at any time, according to people familiar with the matter. It would be the biggest challenge yet to the nearly $35 billion deal struck in 2014 to combine the world's second- and third-largest oil-field services firms after Schlumberger Ltd.

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The lawsuit would land near the top of the list of major mergers contested under the Obama administration, a list that includes legal challenges to AT&T Inc.'s planned acquisition of T-Mobile USA and General Electric Co.'s planned sale of its appliance business to Electrolux AB, both of which were abandoned.

It would mark the department's most notable flexing of its enforcement muscles since Comcast Corp. abandoned its planned acquisition of Time Warner Cable Inc. a year ago in the face of opposition by the department and the Federal Communications Commission.

Halliburton has defended the merger, saying that combining forces with Baker Hughes would create a stronger, more efficient company -- helping its customers keep costs down in the face of lower oil prices.

"We strongly believe the proposed merger is good for the industry and for our customers," Halliburton Chief Executive Dave Lesar said earlier this year.

Baker Hughes CEO Martin Craighead said in January, "We fully believe in the potential of the combined companies to better serve customers with a broad suite of products and technology."

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But increasingly, skeptics have questioned whether it could pass regulatory muster.

Antitrust officials in Europe, Australia and Brazil have also raised concerns that the combination of Halliburton and Baker Hughes would reduce competition, leaving customers with fewer and more expensive options.

Since the deal was struck, the oil-field services industry has additionally faced severe setbacks, as persistently low oil prices have slashed demand for the work they do drilling wells and pumping oil and natural gas.

"They've been stretching and bending and working feverishly to try and find ways to make it palatable for the regulators," said Dan Pickering, co-president of Tudor Pickering Holt & Co., an energy investment bank. "So the question is how hard will they continue to fight?"

Halliburton and Baker Hughes declined to comment Tuesday.

The Justice Department hasn't shied away from voicing concern over a wave of mergers and challenging deals it believes to be anticompetitive in recent years. The lawsuit could set the tone for 2016, the last year for Obama appointees serving under a president who had promised to reinvigorate antitrust enforcement.

The department is separately giving close scrutiny to several other major deals, including health insurance mergers that propose to combine Anthem Inc. and Cigna Corp., as well as Aetna Inc. and Humana Inc.

The Federal Trade Commission, the Justice Department's sister antitrust agency, also has brought several recent deal challenges, most notably a lawsuit against the proposed tie-up of Staples Inc. and Office Depot Inc.

That case is currently in federal court, where the FTC has at times struggled during proceedings in front of a federal judge in Washington, D.C. The companies, however, made a big strategic gamble Tuesday, choosing not to present a defense to the government's case. U.S. District Judge Emmet G. Sullivan is expected to rule next month.

Department officials viewed the Halliburton deal somewhat skeptically from the outset and the companies haven't been able to alleviate the government's concerns, according to people familiar with the matter.

The Wall Street Journal reported last December that the department was concerned the deal would suppress competition and questioned whether another company could buy enough assets from Halliburton to become credible rivals.

Some antitrust experts predicted the deal would raise red flags. But even as it became clear that regulators were taking a hard look, many analysts have said they believed the company and its lawyer, Sean Boland, had prepared for a difficult path.

Mr. Boland is the co-chair of Baker Botts LLP's antitrust practice and has helped oil-field firms including Smith International Inc., Dresser-Rand Corp., Baker Hughes and National Oilwell Varco and National Oilwell Varcosuccessfully navigate through regulatory approval.

Federal agencies have taken a stronger enforcement stance in recent years, said Fiona Schaeffer of the law firm Milbank, Tweed, Hadley & McCloy.

"When the deal was first conceived, they didn't have that landscape of challenged deals before them to consider," said Ms. Schaeffer.

News of the expected move to block the Halliburton-Baker Hughes deal comes a day after the government released stringent new rules on a type of acquisition, known as an inversion, that has helped fuel the historic boom in mergers.

That move sent shock waves through the market, battering shares of a number of companies seeking to pull off inversions, none more than Allergan PLC, which had agreed to be bought by Pfizer Inc.

But Pfizer has decided to end its proposed $150 billion takeover of Allergan after the Obama administration took aim at a transaction that would have moved the largest drug company in the U.S. to Ireland in order to lower its taxes, according to people familiar with the matter.

That underscored what many deal-makers have long said is one of the biggest threats to the recent rise in takeovers: regulators.

When Halliburton and Baker Hughes agreed to the deal in 2014, Halliburton agreed to a steep $3.5 billion fee if the deal failed to clear antitrust review, and the companies said they would be willing to jettison businesses that have generated as much as $7.5 billion in revenue.

But 2015 came and went without indication that several antitrust authorities around the world were prepared to sign off. In December, the U.S. Justice Department held off on deciding whether to approve the merger, but didn't move to block it. The companies said regulators weren't satisfied with their proposal to sell businesses that generated more than $5 billion in revenue, forcing them to propose hiving off additional businesses.

Shares of the two companies have often traded at levels that indicated skepticism about the deal's prospects. On Tuesday, Baker Hughes shares fell 5.1% to $39.36 -- about 60% below the price implied by Halliburton's offer. Halliburton shares rose 1.2% Tuesday, to $34.40.

The Justice Department signaled earlier this week that it still had concerns. In a lawsuit filed Monday against ValueAct Capital Management LP, an activist hedge fund that took stakes in both companies after the deal, the department noted that the merger "threatens to substantially lessen competition in numerous markets."

In January, the European Commission, the European Union's top antitrust authority, started an in-depth investigation into the combination. Last month, the commission suspended the review, saying it needed more information from Halliburton.

--Dana Mattioli contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com and Alison Sider at alison.sider@wsj.com